Question

Required information Problem 18-6A Analysis of price, cost, and volume changes for contribution margin and net income LO P2, A1 (The following information applies to the questions displayed below.) This year Burchard Company sold 40,000 units of its only product for $17.00 per unit. Manufacturing and selling the product required $125,000 of fixed manufacturing costs and $185,000 of fixed selling and administrative costs. Its per unit variable costs follow $ 4.50 3.50 Material Direct labor (paid on the basis of completed units) Variable overhead costs Variable selling and administrative costs 0.45 0.25 Next year the company will use a new material, which will reduce material costs by 50% and direct labor costs by 50% and will not affect product quality or marketability Management is considering an increase in the unit selling price to reduce the number of units sold because the factory's output is nearing its annual output capacity of 45,000 units. Two plans are being considered. Under plan 1, the company will keep the selling price at the current level and sell the same volume as last year. This plan will increase income because of the reduced costs from using the new material. Under plan 2. the company will increase the selling price by 20%, This plan will decrease unit sales volume by 5%. Under both plans, the total fixed costs and the variable costs per unit for overhead and for selling and administrative costs will remain the same.

Answer 1

Plan 2 $ 20.40 $ 2.25 Per Unit: Plan 1 Sales $ 17:00 les. variable costs: Materials $ 2.25 Direct labor $ 1.75 1$ 1.75 Variable overhead costs $ 0.45 $ 0.45 Variable & kA costs I 0:25 $ 0.25 Total variable costs 1 4.70 1$ 4.70 Contribution Margin 1$ $ 12.30 $15.70 calculation Plan 2: Selling Price increase by 20% Sales Per Unit = {$19 +($17 x 20 7.)] - $17+ $3.4 $20.40 Plan 1 & Plan2: Material costs reduced by so% Material = $4.50-($4.50x50%) $4.50 - $2.25 a $2.25 Direct labor reduced by 50% Direct labor = $3.50-($3.50x50%) = $3.50 - $1.75 * $1.75 - contribution Margin & (Sales Per Unit - Variable cost per unit) Plan 1: Contribution Margin = $17.00 - $4.70 $12.30 Plan 2: Contribution Margin = $20.40 - $4.70 & $15.70

Contribution margin Ratio Contribution Margin Ratio Margin Ratio Plan 1 Contribution Margin Ratio choose Choose Numerator: Denominator Contribution margin Per Unit sales per unit $ 12.30 / $ 17.00 72.357 Break-even point in dollars Break-even point Choone Numerator: V choose Denominator = in dollars Contribution Break-even point Total fixed costs 7 in dollars $ 310,000 / 72.35% $426,473 Plan 2 contribution Margin Ratio contribution margin Contribution ( sales per unit Per Unit $15.70 $ 20.40 = . 76.96% Break-even point in dollars Contribution Break-even point Total fixed costs / margin Ratio - in dollars 11 76.96 % $402,807 calculation. Total fixed costs = (fixed manufacturing costs & fired M&A costy total fixed costs $125,000 + $ 185,000 $310,000 margin Ratio $ 310,000